The upward trend in the US stock
market can't be denied – yet I continue to have my doubts and continue to be concerned about another sideways market
trap. To understand my concerns, please do the following.

Go to Yahoo Finance and pull up the one-year chart for SPY, the
exchange traded fund the Standard & Poor's 500 index. You can see in this chart that the stock market is exactly at the
spot it was back on January 20, 2010. You can also see that after the market surged off its lows in February of 2010 and peaked
in April, it traded in a clear sideways pattern. Now, again we find ourselves at the upper end of the range; and it is useful
to ask the question: What will propel this market forward?

The answer must of course lay in improving economic fundamentals.
So let's do a quick overview using my Always a Winner forecasting model.

For starters, according to the Dismal Scientist website, the ECRI Weekly Leading Index "has been on a more positive trend recently,
though is not yet consistent with a stable recovery.” That's good, but still a question mark.

As another positive, the ISM
Manufacturing Index is still comfortably in the expansionary range at 56.3 – so our investment led recovery still has
some investment leadership.Consumer confidence rebounded in August – that's good news – but it is still at levels consistent with
slow growth. In a similar vein, retail sales have risen for a second consecutive month, albeit at a slow pace. Again some
good news tempered with reality.

The most startling bad news is the horror show that is new-home sales. After spiking in April
on the basis of what were then optimistic views of the economy coupled with government subsidies, home sales have fallen off
a cliff and now remain at a record low. In fact, this country is adding less than 300,000 new home units a year at the current
pace in a country of almost 300,000,000 people.

On top of this, existing home sales are at an 11 year low, with
only 4 million units being sold a year.Finally on the unemployment front, this country is generating fewer than 100,000 jobs per month,
which is far too low to materially reduce the rate of unemployment.So when we cycle back from this fundamental data to the technical indicators, you can see that
there is at least some case to be made for an upward stock market trend – if for no other reason than the risk of a
double dip recession seems to be receding and the US economy is plugging, if not chugging, along.

That said, in order to project
from this current short-term upward trend of the market a sustainable bullish move, one would have to heavily discount the
coming Obama hammer in 2011 in the form of higher taxes and a greater regulatory burden to be imposed on the private sector.Make no mistake about it, the "passive
aggressive" tax hikes the Obama administration will impose are significant – passive because Obama is going to
allow the Bush tax cuts to expire, aggressive because ObamaCare and other Obama programs are going to significantly raise
taxes.

So we return to the eternal question posed by this newsletter: What are traders and investors supposed
to do?

At this point, short-term traders may well be able to take advantage of a continued uptrend; but if it turns out
to be a sideways market trap as I fear, only tight stop losses and sound money management principles will save you from the
kind of mini-gutting that many traders suffered in the month of August – again refer back to the chart of SPY and you
will see exactly what I mean.

As for long-term buy-and-hold investors, if you have been simply putting your money on a set of speculations
on secular trends that I presented in my video series for the Street.com, you'd be sitting pretty right now. Those speculations,
which I have done in conjunction with analysts Greg Autry and Jaysen Harris, included:

·Shorting Palm at $12 – it went as low as three dollars

·Shorting RIMM at $70 – he went as low was $47

·Going
long Apple – our call was at $250 and it is now at $292

In addition, I have for a long time recommended keeping at least
20% of one's portfolio and small-cap biotech stocks. Many of the biotech stocks – but not all – in my portfolio
are based on the analysis of a former student of mine and contributor to my website – Andrew Vaino of Roth capital.
Three of the best calls on this biotech front that have appeared in this newsletter include:

·Prolor at 40 cents -- it went as high as seven dollars

·Savient Pharmaceuticals – two weeks ago, I said on CNBC when it was
at $14 that if it got FDA approval, it would go above 20 and it has.

·Chelsea Therapeutics – I first mentioned this stock in the newsletter when it was about three
dollars. On CNBC 10 days ago, I said it could double if the FDA approved its drug and projected such approval the stock is
gotten as high as seven dollars.

The only bad news I can report right now about my small cap biotech speculations is that, with
the exception of SNT which has an important conference coming up, there are no short-term catalysts on the horizon likely
to move any of the ones I'm currently holding – so they are true buy-and-holds. Here's what's in my portfolio currently:

CHTP (I sold half of my position on the FDA news and I'm letting the other half ride for a bit); DEPO,DUSA,LPTN,MDVN,MITI,NRGX,SNT,SNTA.

I have also
begun building a small position in a company called Stellar, which is a pink sheet penny stock which has an interesting story
which I will share with you a future newsletter. (Anybody who has any information on this company, please share with me).
I will also be sharing more with you about SNT in the coming weeks as I continue to find this company frustratingly interesting.

As a final
note, there are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon
Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't
look quite right, trust the syntax and make your own internal correction.

The stock market continues to show technical
improvement – even as the economy continues to exhibit fundamental deterioration. On the technical front, Market Edge
has its Strength Indices showing improvement while its Momentum Index remains very strong. At the same time, 81 of the 91
Industry Groups followed by Market Edge are rated either strong or improving. This all adds up to a stock market that continues
to inch up on weak volume.

Because the economic fundamentals do not yet support this early cyclical uptrend, I continue to think
it may simply be a sideways market trap. Two things that caught my eye last week included an unexpected drop in Consumer Sentiment
and a fallback to zero for the core inflation rate is measured by the CPI. Both are recessionary signals. On the other hand,
the ECRI weekly leading index has stabilized and resumed a modest upward trend, which is bullish news.

Of course, the big macro
puzzle right now is why gold is hitting an all-time high even as deflation continues to loom is a real possibility. My favorite
explanation, which I have offered to you before, is that because of the large budget deficits both Europe and the United States
are running, gold as slowly and quietly becoming the de facto reserve currency of the world.

On other macro notes,
we had yet another round of sparring over Chinese currency manipulation, this last week on Capitol Hill. Treasury Sec. Timothy
Geithner continues to maintain the untenable position the Chinese currency is grossly undervalued but that China is not a
currency manipulator. The only thing clear about the situation is that China continues to benefit from its undervalued currency
and its economy booms while America goes bust.

The other big news that has important implications for the American economy
on the currency question revolves around the manipulation of the Japanese yen by China through its large bond purchases in
Japan. These purchases are now forcing Japan to once again intervene in its currency market to weaken the yen – and
thereby gain back some advantage against countries like America in China.

Given the economic uncertainty, I continue to
hold significant fraction of my portfolio in cash while focusing on small-cap biotech stocks for returns based on science
rather than the economic cycle. Over the next week or so, one of those stocks – Chelsea Therapeutics – will have
its day of reckoning with the FDA regarding the viability of its hypertension drug Droxidopa. As I discussed on CNBC, Roth
Capital’s Andrew Vaino is handicapping the odds of success at about 75%. Stay tuned.

On CNBC, also said it was time to take your profits
in Savient Pharmaceuticals as, after its FDA victory, it has now risen to fair value – and will only rise further if
there is a bidding war over the company. While this is a possibility, it may be better to deploy capital elsewhere.

On the other
biotech fronts, LPTN saw a slight uptick in volume and price for a stock that is incredibly thinly traded. Translation: risk
is extremely high but there appears to be some movement on no news. When I see such movement, it often means that something's
going on within the company that may soon come to light. Stay tuned.

Last take: Be on the lookout this week for my latest
video for the Street.com where I will rate Nokia short or long.

Question for my readers: If any of you have any information about a penny stock called Savi Media (SVMI)
please send me an e-mail. The company makes a valve which claims to provide significant fuel efficiency and environmental
benefits. If true, this two cents stock should shoot to the Moon. However, that clearly has not been the case. Anybody
who can solve this SAVI mystery for me – is a fly-by-night pump and dump company or a misunderstood genius? –
I’d love to get your thoughts.

Seeds of Destruction hit the Top 100 on Amazon last week in the business and economics category.If you want to listen to the Introduction to the book, you can download the audio file from the
top of this page.

Newsletter: Temptress

Boy
have I seen this pattern before.IBD confirms a new uptrend.Market Edge shows a broad
technical improvement to the market.Talking heads say get in while the getting is good – and don’t
worry about the weak volume.Shall I be seduced?

I don’t think so.All
I need to do to be convinced that this is another harlot is to look at the one-year chart of SPY.For starters,
you can see a clear range bound market since May.

You can also see that prior to this range-bound
pattern, SPY peaked at a little over 120 for the year in April and right now it’s just below the short term high of
112 that it reached in the Summer run-up from July 2.

It was that Summer run-up that was the last Temptress that sucked
in a lot of retail investors and then slammed them with a sharp 10% decline.Trust me, only the Big Money
Computer Traders are making out like bandits in this kind of sideways environment.

So in order to tempt me, SPY has to blow past
120 with above average volume and broad sector support. In order to do that, the economy is going to have to show a lot more
strength.Until then, cash is king.

Here I am, back from a three-week
hiatus. You may recall from my last newsletter prior to that hiatus I urged all my long term investors to stay in cash while
possibly allocating some portion of their portfolio to biotechs.

So far, this seems to have
been pretty good advice. The stock market had one of its worst months of August ever. Of course, over the past week or so,
the market has been rallying so many of the talking heads are all a twitter about the arrival of a new bull market.

This continues to seem pretty much like a sucker's game to me. To understand why, try this little
exercise. Go to Yahoo finance and pull up the three-month chart for SPY -- the exchange traded fund the Standard & Poor's
500 index. If you got suckered into buying the bottom hit on June 6, you would've had a very healthy gain by June 17. However,
by July 6, you would've been deep in the red.

By the same token, if you bought
the bottom on July 2, you would have been in great shape right up till August 9 – and then been gutted like a pig.

Okay, so let's say you were smart enough to buy the dip on September 3 at $105 a share. Now you're
up already five bucks and you think you're a genius. But what makes you think that after another run-up, the market is just
going to run right back down?

Please keep in mind, I'm usually not this cynical about the
market trend. Usually, it's pretty damn clear whether the economy is, as Bob Dylan might say, "busy being born"
or "busy dying." But there is so much uncertainty right now in the economy, that the only really sensible thing
for the market to do is to trade in the sideways pattern until things resolve themselves.

I
myself am not particularly in the double dip recession camp. When I see is what we've had over much of the last decade –
slow GDP growth well below our potential output. That will in turn mean persistent high employment and stagnant wage growth.
How you get a bull market out of that – and the Dow at 20,000 – I really don't know.

I
wish I had better news, but we have to trade or invest the hand that we are dealt – or sit patiently on the sidelines
in cash.

For traders, I myself am growing increasingly disenchanted with a long short strategy
unless you have great skills at risk management and rapid trading.

What happens in a sideways
market with a hedge portfolio is that your shorts get stopped out when the market runs up, and your longs get stopped out
when the market runs down. All you wind up with is modest losses over a lot of stocks that add up to a big loss – plus
a lot of transactions costs.

So if you didn't make any money over the last couple months
in your short-term trading strategy, I'd strongly advise you to hang your cleats and mouse up for a while until this market
is easier to make money on.

As for the long-term investor, I continue to recommend cash for
now. I also continue to hold about 20 to 25% my own portfolio and small-cap biotechs. And by the way, I will send you a Special
Report on my biotech picks this coming Wednesday based on a conversation I had one of the top biotech analyst in the world
– Andrew Vaino of Roth capital. (I did a segment last Friday on CNBC that talked about a few of the stocks Andrew is
following, but a lot of the best stocks I could really talk about on TV because their small caps.)

Last
take: my new book Seeds of Destruction with former Bush White House chief economic advisor Glenn Hubbard is now available on Amazon and at Barnes & Noble and,
as they say, other fine bookstores everywhere. Please buy this book right away, not because I need your royalty money, but because unless the boneheads in Washington change their policy tunes
pretty damn quick, we are going to keep heading right down the tubes.

DISCLAIMER:
This newsletter is written for educational purposes only.By no means do any
of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.Trading and investing involves high levels of risk.The authors
express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.The authors may or may not have positions in the financial instruments discussed in this newsletter.Future results can be dramatically different from the opinions expressed herein.Past performance does not guarantee future performance.

DISCLAIMER: The newsletters
and blogging on this page are written for educational purposes only.By no means
do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.Trading and investing involves high levels of risk.The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.The authors may or may not have positions in the financial instruments discussed in
this newsletter.Future results can be dramatically different from the opinions
expressed herein.Past performance does not guarantee future performance.